Know Your Customer (KYC) is a practice practiced by businesses and other financial institutions to identify and verify their customers in accordance with laws, regulations, and other legal requirements. KYC is the first step in building and maintaining a relationship between a company and its customers.
This ensures that business owners and other stakeholders receive detailed information about their clients’ investment knowledge, financial situation, and risk appetite. Before undertaking any significant financial transaction, especially involving large sums of money, it is ideal to know your customer before or during the transaction.
The COVID-19 pandemic has prompted businesses and other financial institutions to perform KYC processes digitally, allowing them to continue doing business despite restrictions being imposed. KYC is becoming increasingly popular among banks, lending companies, insurance agencies, and other businesses to avoid cases of bribery, money laundering, corruption, and other illegal transactions.
But exactly what is KYC? Or What is Know Your Customer or Know Your Client? Let’s learn about it in a detailed manner.
Table of Contents
- What is KYC?
- Importance of KYC
- History of KYC
- Process of KYC
- Documents Required for KYC
- Agencies for KYC Verification
- KYC Online Verification Process
- KYC Offline Verification Process
- Final Remarks
- Similar Articles
What is KYC?
The Know Your Client (KYC) or Know Your Customer (KYC) is a process to verify the identity & other credentials of a financial services user. KYC is a regulatory process of ascertaining the identity and other information of a financial services user.
In other words, banks must make sure that their clients/customers are genuinely who they claim to be.
Banks may refuse to open an account or halt a business relationship if the client fails to meet minimum KYC requirements.
Importance of KYC
To be mandated by the law, the Know Your Client (KYC) process also helps financial institutions in several ways:
- Helps lenders perform risk assessment by identifying the previous financial history and assets owned
- Limits fraud that results mainly due to hiding of identity
- Prevents money laundering and other anti-social activities
- Brings stability and investment to the country, as it makes the financial framework more trustworthy and less risky
- Decreased uncertainty allows institutions to lend more to customers and increase their profits
A number of countries and economic regions oversee financial anti-money laundering agencies or regulators that overview financial transactions to prevent tax evasion, terrorism financing, and other anti-social activities. All institutions are part of the Global Financial Action Task Force (FATF), which oversees financial transactions around the world.
History of KYC
In recent years, KYC laws and regulations have been raised to a higher standard to accommodate banks and other established institutions. All companies that conduct financial transactions are subject to regulatory influences and limited instances of money laundering and fraud.
Let’s see the introduction of KYC in some countries:
The Patriot Act of 2001, passed after the 9/11 terrorist attacks in the United States, led to the introduction of KYC laws in the country. Laws were put in place to detect and deter terrorist activity within the country. Enforcement guidelines and other requirements were added to the existing Bank Secrecy Act of 1970, which carries out regulatory functions for banks and other institutions. The Patriot Act had been under scrutiny for years before terrorist attacks but was enacted after politicians recognized its importance and role in preventing such attacks.
The Reserve Bank of India introduced a KYC policy for banks in 2002.
Established in 1989, the Australian Trade Reporting and Analysis Center (AUSTRAC) monitors financial transactions in Australia and establishes customer identification requirements.
Banca d’Italia has regulatory powers over the financial industry and in 2007 established its KYC requirements for financial institutions operating in Italy.
The updated KYC law was enacted in late 2009 and went into effect in 2010. KYC is mandatory for all registered banks and financial institutions.
The Money Laundering Regulations 2017 are the basic rules governing KYC in the UK. Many UK businesses use a combination of the European Joint Money Laundering Steering Group’s guidelines and the Financial Conduct Authority’s ‘Financial Crime’: A guide for companies to help them comply.
Process of KYC
The KYC process is simple and only slightly different from country to country. A simple KYC process is explained below:
Step-1: Document Submission
Applicants or prospective users of financial services are required to provide documentation to verify their identity and residency status. Submissions can be made in either electronic or physical format.
Step-2: Identity Verification Process
Identity verification will be carried out by authorized agencies/organizations based on the submitted documents. For example, if an applicant presents a driver’s license, the DMV will verify it.
Step-3: Verification of Residence Proof
In the residence examination, it is necessary to confirm the status of residence (domestic or foreign), current address, another place of residence, citizenship, etc.
Step-4: Financial Status Verification
Claimed assets and liabilities are verified through documentation, communication with issuers, and physical checks. This reduces the risk of making false statements.
Step-5: Screening the Transaction
Financial institutions screen transactions executed by customers/principals, different/higher value transactions, more frequent transactions, etc. are automatically flagged and subject to rigorous manual review.
After completing all the steps above, the individual/entity is considered KYC verified. It may contain a verification certificate, but usually, it does not. While this process may be easy for users, the verification process for financial institutions requires dedication and diligence. The KYC process is an integral part of various due diligence checks performed by companies, investors, banks, etc.
Documents Required for KYC
KYC processes are performed for both individuals and organizations. KYC verification is based on identity and residency verification. Documents required for KYC process for an individual include normal documents commonly used by an individual, such as:
- Driving License
- Identity Proof
- Docs. Issued by the Govt.
- Documents that can be presented as proof of residence are:
- Utility Bills. For example, Electricity Bill, Gas Bill, Telephone Bill, etc.
- Bank Account Statement
- Rent Agreements or Housing Contracts
Agencies for KYC Verification
As already mentioned, the KYC process takes a lot of time and effort. Hiring staff to perform physical inspections is a cumbersome and expensive task. Smaller financial institutions have higher costs. As a result, the KYC process is usually outsourced to agencies that specialize in it. There are two main reasons for this:
Agencies offer cost savings for this due to economies of scale.
The choice of institution to perform KYC depends on the type of verification required. Some processes such as Opening a bank account may not include verification of assets and liabilities. So, there are some important facts to consider.
- Does the agency provide all the services you need? Some agencies may only provide identity and address verification. Document review coverage may vary as some institutions may not offer international coverage or coverage of documents in different languages.
- The most important factor is whether the agency is verified/licensed by the relevant regulatory body in the jurisdiction.
- The tools and technologies used to process data and whether they are secure enough to prevent loss of documents and loss of customer confidentiality.
- The price offered should be significantly lower than the cost of otherwise performing the procedure.
KYC Online Verification Process
Updating your KYC online is a simple process and can be completed without the hassle of going directly to a kiosk. Here are the steps:
- Log in to the KYC online portal.
- Look for the Update KYC button in the settings of the portal.
- Clicking the button opens a set of KYC settings.
- Updating anything that needs to be changed will upload the latest scanned copy of the relevant document and change the name or address. Before your information is saved and sent for verification, you will be required to confirm a one-time password sent to your registered mobile phone number or email address.
- Once you have entered the OTP correctly, click the Submit button. Your details will be verified and you will be notified within a few days if the KYC verification has been completed without errors.
KYC Offline Verification Process
The offline KYC process is like the online process. However, the key difference is that a physical copy of all documents and applications is required.
- Download, print, and complete the KYC form. You can also obtain an official copy of this application from the Mutual Fund house or KYC kiosk.
- Fill out the form with updated information that will be spell checked. Please do not leave the field blank. You will also be asked for details of Aadhar and PAN. Make sure both numbers are entered correctly.
- Once you have completed the form, please visit your nearest KRA with all documents and submit your application in person.
- You must submit proof of identity and proof of address with your application. Please save a copy of these documents before doing so. In addition, some mutual fund houses or kiosks may require biometric scans, including fingerprints, handprints, and possibly photographs.
- After submission, you will be assigned an official application number. You can use this to check the status of your KYC verification.
The offline KYC process takes about a week, while the online KYC registration takes lesser time. However, this may vary depending on various factors such as whether the application contained any errors, inconsistencies, or ambiguities. Therefore, please ensure that the form is filled out correctly with all up-to-date information.
Both online and offline KYC verification procedures take about a week to be approved. Online KYC registration takes significantly less time, but this depends on many factors, Are there any errors, discrepancies, or ambiguities in the application? As such, it may take longer than usual for updated information to appear, depending on which portal you do KYC with. However, you can speed up this entire process by ensuring that your forms are filled out correctly with up-to-date information.
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